FSRC Final Report: Impacts on Vertical Integration

3 mins  11.02.2019 Mark Standen, Victoria Allen, Kate Hilder
The absence of a specific recommendation mandating change does not reflect the full story for industry.

Key questions to consider

1. To what extent is our business geared up, from a systems, technology and human capital standpoint, to operationalise the recommendations?

2. For the larger players, is it feasible for us to meet new expectations, in our current structure?

3. If we, as a board determine that it is, then how will we demonstrate that we've acted to address conflicts, and deliver product in accordance with heightened expectations?

Vertical integration

There is no recommendation in the report mandating the structural separation between offering products and providing advice.

Commissioner Hayne writes: 'Enforced separation of product and advice would be a very large step to take. It would be both costly and disruptive. I cannot say that the benefits of requiring separation would outweigh the costs, and the Productivity Commission concluded that "forced structural separation is not likely to prove an effective regulatory response to competition concerns in the financial system". I am not persuaded that it is necessary to mandate structural separation between product and advice'. But the absence of a specific recommendation mandating change, does not reflect the full story for industry.

Death by a thousand cuts?

Commissioner Hayne makes a number of recommendations primarily aimed at 'eliminating' conflicts of interest which he observes may, in combination with other factors, impact the profitability of vertically integrated entities (by increasing costs). This will likely result, he suggests, in a continuation of the trend away from vertical integration in the industry, even in the absence of forced structural separation. His view is that this would be no bad thing for consumers, as it will 'help to reduce or further 'eliminate conflicts of interest' and their associated negative consequences for consumers.

These factors include (among others):

  • mortgage brokers will owe borrowers a best interests duty (Recommendation 1.2)
  • mortgage brokers, 'after a sufficient period of transition' will be subject to regulated by the law that applies to entities providing financial product advice to retail clients' (Recommendation 1.3)
  • repealing grandfathering provisions for conflicted remuneration (Recommendation 2.4),
  • annual renewals of ongoing financial advice fees (Recommendation 2.3)
  • recommended changes to the way in which superannuation products are sold (Recommendation 3.4)
  • the requirement that superannuation fund trustees be absolutely independent (Recommendation 3.1)

The Commissioner observed that 'the internal efficiency of the "one stop shop" does not necessarily produce efficiency in outcomes for customers. The "one stop shop" model creates a bias towards promoting the owner's products above others, even where they may not be ideal for the consumer. Coupled with his suggestion that the ACCC undertake 5 yearly market studies into the effect of vertical and horizontal integration in the financial system (commencing this year), it is apparent that he takes a dim view.

Impact for industry

As a result, we anticipate divestment and capital management initiatives to dominate the strategic thinking of the boards of some of the larger players in 2019.
This is particularly so given the large amount of management time required to address systemic issues highlighted over the course of the Commission hearings, which often distracts the business from focusing on core operations, together with compliance and regulatory costs.




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